June May Signal a Hot Streak in S&P 500

So here we are in June. Can you believe the year is almost half over? Some 156 days have already clicked past, and there are 209 more to go. If there was something you really wanted to accomplish in 2016, there’s still time. But less of it, is all I’m saying.

Not sure what Mr. Market is trying to accomplish. The Dow Jones Industrials (DJI) are up 2.19% for the year. And the Russell 2000 is up 2.49% for the year. The S&P 400 Midcaps(IJH) have fared much better, rising 8%, while the Nasdaq 100(QQQQ) is down 2%.

Now we’re facing June, which tends to be one of the most humdrum months for the market in part because of a lack of catalysts, and the fact that volume starts to dry up.

For a much more penetrating analysis than that, let’s turn to analyst Jason Goepfert, of Sundial Capital Research. He makes this interesting observation:

The S&P 500 hit a 12-month low in February. Since then, it has risen for three straight months. If it also rises in June, odds are good for even more gains.

Here’s why. He rifled his database and found that the last time the S&P 500 managed to string together three consecutive positive months following a 12-month low was in May 2009. We should only be so lucky to get a repeat of May 2009! The market rose 40% over the next year.

To learn more, he went back to 1928 and looked for every time the S&P 500 fell to a 12-month low then rallied for the next three months. It turns out that the medium-term did indeed show some signs of lasting momentum, he reports. Stocks showed a positive return over the next three months 12 out of 14 times, with an average return about three times larger than random. After that, it was questionable. There were several false signals in there that led to large losses within the next year, 2001 being a perfect example.

Goepfert then notes that a positive heads-up emerged when the S&P 500 rose the next month as well. In those cases, the market tended to record even better returns in the months ahead. But when stocks fell back right away (like in 1957, 1968, 1978 and 2001), then longer-term returns were terrible.

So a positive June would be a very, very good sign according to this study, and a negative June would be a disproportionately bad sign. Stay on your toes.

One last note: When the S&P 500 strings together three positive months on the heels of three negative months, as it did in March, April and May of this year, the overall results were even more positive than the ones following a 12-month low, Goepfert reports.

Sample sizes are small, so beware of that, but it’s encouraging background on how intense pain felt from losses, followed by a wary happiness from gains, have worked their way through the psychology of the human mind and heart into stock prices.

Mobility as a Service (MAAS) jumped back into the headlines a couple of weeks ago when Apple (AAPL) announced it was making a $1 billion investment in Didi Chuxing, China’s largest ride-hailing company.

It’s not as though MAAS slipped into the blind spot of the automobile industry. The sector is being disrupted, and leading carmakers know it. Ford (F) is building an independent mobility services division. General Motors (GM) invested in ride-hailing startup Lyft, and it’s working with Maven, a ride-sharing company. And Uber is tooling around the streets of Pittsburgh in self-driving Ford Fusions even as it shakes up traditional taxi fleets worldwide.

Cultural mores are changing, and the car business is being put on notice. As people become not only greener but also more willing to rent and share the stuff they need, traditional car ownership makes little sense. Cars are typically used less than two hours daily, they create pollution and traffic. Car-sharing and ride-hailing services reduce traffic congestion and pollution because they reduce the number of vehicles in use. When cars become autonomous, these trends will accelerate.

For carmakers, the writing is on the wall. There is a paradigm shift coming, and old profitability models are going to be run over. The most-likely scenario would see profitability shift from volume to premium carmakers. For example, a second car used only to run errands — like picking up the children from school or grocery shopping — could be replaced by a mobility service. That family might use the savings to upgrade the car it still owns.

And that’s what makes Apple’s Didi Chuxing investment so interesting. Apple’s electric-car aspirations are no longer in dispute. Project Titan is a go. A vertically integrated, premium-product business model that connects smartphones to vehicles makes sense for Apple.

In China, Didi Chuxing is a mobility services powerhouse, complete with machine-learning and big-data chops. It completes 11 million rides daily, by operating shared-bus, designated-driver and premium car services. It has the reach and software platform to put premium Apple cars into the biggest and now most important luxury car market in the world.

For Apple, getting there with Didi Chuxing would mean no upselling and a huge, reliable subscription-based revenue stream. And there is precedent for this approach. Last year, LeEco, a Chinese conglomerate, purchased 70% of another Chinese mobility services firm, Yidao. LeEco is best known outside of China for its splashy investment in Faraday Future, a company that plans to build electric cars in the U.S. and offer them as a subscription service.

Still, competition will be extreme. Apple has no bona fides as a premium car maker and the others have no incentive to yield as it merges into the marketplace. China’s Internet search leader Baidu (BIDU) already has a longstanding working relationship with BMW (BMW). In fact, a recent McKinsey study showed German automakers including Mercedes (DDAIF), Audi(AUDVF) and Porsche (POAHF) hold approximately 80% of the luxury market. Making inroads is not going to be easy.

Many observers worry about Apple’s next big thing considering the saturation of the global smartphone market. With the Didi Chuxing investment, the outline of its car business is starting to take shape.

Apple CEO Tim Cook likes to talk about how well Apple’s services are performing — apparently disregarding its recent flop in music services and its failure to follow through on its promise to disrupt the television industry. Adding luxury cars would certainly gas-up results if successful.

But this is no reason to buy Apple now. The car manufacturing business is super-tough, as Tesla (TSLA) can attest, and competition is intense. The path ahead is long, winding, and littered with obstacles. An electric car is not just an iPhone with wheels. If Apple is successful, awesome, but make no mistake — the odds, and competitors, are stacked against it.

Best wishes,

Jon Markman

Jon began his career as editor, investment columnist and investigative reporter at the Los Angeles Times. As news editor, his staffs won Pulitzer Prizes for spot-news reporting in 1992 and 1994.

In 1997, Microsoft recruited Jon to help launch MSN’s finance channel, where he served as Managing Editor. In that capacity, Markman became the co-inventor on two Microsoft patents.

From 2002 to 2005, Jon served as portfolio manager and senior investment strategist at a multi-strategy hedge fund.

Mr. Markman is the author of five best-selling books, including Reminiscences of a Stock Operator: Annotated Edition; New Day Trader’s Advantage, Swing Trading and Online Investing.

{12 comments }

GordonTuesday, June 7, 2016 at 11:01 am

The new way of sugar coating data. The experts keep saying well it dropped but it did not drop as much as we anticipated thus the synopsis is good and the stock goes up. We live in a world where the economy is sick but just not as sick as we figured. Go figure.

GordonTuesday, June 7, 2016 at 11:08 am

The following statement pretty explains the Fed and its recent actions

The Fed has a lot of official and implied “mandates.”

Mainly, it’s tasked with managing inflation and pushing the economy towards full employment.

Needless to say, it’s done a poor job of both since 2008 and there’s a good reason too.

Inflation and full employment is not the Fed’s top priority anymore.

The Fed’s current primary focus is keeping credit markets moving. Everything else is a distant second.

GordonTuesday, June 7, 2016 at 1:36 pm

And the beat goes on
Goldman Sachs is being investigated for involvement in the 1MBD debacle in Mayalasia.
Try and read some sense into this one.
Yellens comment??
Yellen positive about economy but stressed about uncertainty?? What kind of asinine statement is this??

VinmanWednesday, June 8, 2016 at 10:41 pm

Gordon sounds like Yellen has been coached in the art of GreenSpeak !!! Lol !!!

EdTuesday, June 7, 2016 at 5:02 pm

this is a new RIGGED market have you noticed it ONLY drops so much then goes back up and it is flat much of the time . . it is RIGGED don’t buy it

HHNTuesday, June 7, 2016 at 8:00 pm

If Apple would just please go away and make Markman’s life easer for the rest of us… but alas, unicorns and rainbows are still too illusionary and transitory in spite of our best efforts to the contrary.

J WAYNE MITCHELLWednesday, June 8, 2016 at 6:41 am

HOPE IT WORKS

J WAYNE MITCHELLWednesday, June 8, 2016 at 6:45 am

If Apple would just please go away and make Markman’s life easer for the rest of us… but alas, unicorns and rainbows are still too illusionary and transitory in spite of our best efforts to the contrary.